Background

The Appellant, Tidal Energy Ltd ("Tidal"), was a customer of Bank of Scotland Plc ("BOS"), which in January 2012 owed to one of its suppliers, Designcraft Limited ("Designcraft"), the sum of £217,781.57. On 31 January 2012, Tidal instructed BOS to pay £217,781.57 to Designcraft and the payment was executed the same day to an account with Barclays Bank ("Barclays") in Bury St Edmunds. The instruction was given to BOS on one of its standard printed CHAPS transfer forms which was signed by two of Tidal's authorised signatories. Various boxes in the form were completed manually.

The terms and conditions on the reverse of the Chaps transfer form principally concerned the timing of payment, cancellation and amendments. It also made it clear that BOS could only comply with any amendment or cancellation of the instruction if received by 3pm on the business day prior to the agreed date for payment. The Payment Services Regulations 2009 ("PSRs") were excluded by the terms and conditions.

At the time the instruction was sent to BOS, Tidal was unaware that it had been a victim of fraud and the designated receiving account did not belong to Designcraft. In consequence, although the recipient's name was correct on the CHAPS transfer form, the sort code, account number and bank name were not. Instead, it belonged to a different company, Childfreedom Limited.

Subsequently on 6 February 2012, Tidal advised BOS that the payment ostensibly made to Designcraft was induced by fraud and asked BOS to contact Barclays to recover the monies. There is some confusion about the date and time when BOS contacted Barclays in relation to the payment and requested them to freeze the funds, but the upshot was that the funds were withdrawn by the account holders and were untraceable.

Tidal claimed that BOS was not entitled to debit its account as no payment had been made to Designcraft who, in any event, did not bank with Barclays, and it was therefore entitled to the return of the monies. Further, its instruction to BOS had not been carried out correctly as the recipient's name on the CHAPS form of instruction did not match the name on the receiving bank account and this should have been checked by BOS. Had it been checked, the payment would have been rejected. BOS rejected this contention on the basis that it was entitled to rely on the identifying components provided by its customer and proceedings were eventually issued.

At first instance, it was held on the true construction of the form of instruction that Tidal had authorised BOS to pay whoever held the account, and the three "identifiers", namely the sort code, account number and bank name, were sufficient for the purpose of making a payment, and the information as to the identity of the beneficiary was irrelevant. However, Tidal was given permission to appeal on the basis that this was a general point of importance and was the first case involving misdirected CHAPS transfer payments.

Decision

The Court of Appeal dismissed the appeal by Tidal (on a majority) with Floyd LJ dissenting.

In its judgment, the Court relied on the decision of Hare v Henty [1861] which contained the statement that "A man who employs a banker is bound by the usages of bankers". Accordingly, subject to evidence to the contrary, there was a clear and settled practice that the receiving bank in a CHAPS transaction did not need to check the beneficiary's name for correspondence with other accepted identifiers for good commercial reasons. Accordingly, it held that a customer who used CHAPS was taken to contract on the basis of the banking practice that governed CHAPS and the banking practice at the material time was to use the bank name, sort code and account number.

Comment

In his judgment Floyd LJ explored what for the purposes of the CHAPS form constituted payment and concluded that it was necessary to look at the "four identifiers" being the name of the account holder in addition to the sort code, account number and bank name, and not the three identifiers which is current banking practice. By limiting the identifying components to three and not checking the name of the account holder, this allowed the funds to be transmitted by way of CHAPS payment to go into any account, and did not in his lordship's view therefore constitute a payment instruction which was complied with.

In this case, had the name of the account holder been checked, it would have been appreciated that the account was not held in the name of Designcraft and the payment would not have been processed.

Tidal are seeking permission to appeal to the Supreme Court and, given the dissenting judgment by Floyd LJ and the importance of the issue generally, and particularly in the prevention of fraud, this may be an issue which will be thought to merit further consideration.